From a transcript of Bruce Berkowitz AAII presentation from June 1, 2011:
It’s not easy; it’s a painful process. You climb this wall of worry eventually over a multi-year period. You get sharp drops like we had today in the market-place. You have to deal with this crazy accounting that companies have now.
The companies have to account for the possibility that they buy back their own debt. So, if a company gets better and is perceived to be of higher quality, then it would be more expensive for them to buy back their debt. They will have to take a loss in their earnings statement because of that. If a company gets crappy on the way to bankruptcy, it means their debt is going to got down in price. They’ll be able to buy the debt back for less money. And they could take a profit on their income statement.
Read the whole transcript (…really, read it).